We’ve often noted the advantage of small mutual funds. Most notably, they have greater flexibility to make significant portfolio changes without affecting the stock market. Then too, a single winning, or losing strategy, can have a significant impact on a small fund’s overall performance.
Among the best Canadian mutual funds this past year is the CIBC Global Technology Fund (Fund code: CIB496 (NL)). In fact, among 796 global equity funds, this one ranked fourth, with a return of 31.3 per cent.
What interests us most about this tech stocks fund, however, is how it managed to excel in global markets over the past year. Last year, an exposure to companies that have capitalized on the fast-growing mobile industry contributed the fund’s top-quartile performance of 18.4 per cent. These companies benefitted from significant earnings growth and rising share prices.
Exposure to companies that are dominant in their industries and can grow earnings also contributed to this top equity fund’s performance. Individual contributors included Google Inc., Skyworks Solutions Inc., a provider of analog and mixed-signal semiconductors worldwide, and Baidu Inc., a Chinese-language Internet search provider. All three companies reported stronger-than-expected revenue and earnings growth.
Tech fund’s diversity is sectoral more than geopolitical
The fund seeks to invest globally, though most of its assets are invested in the U.S. At the end of 2014, its geographic breakdown was as follows: the U.S., 74.3 per cent; China, 17.3 per cent; Spain, 3.1 per cent; Denmark, 1.0 per cent; Germany, 0.6 per cent; and Canada, 0.2 per cent.
Technology funds used to have their own separate category. But the number of these specialized funds has declined in recent years, so global tech funds are now included among global equity funds. When comparing this specialized fund to others in its category, then, it’s a lot like comparing apples to oranges.
That said, the fund does seek to diversify within its sector. Its top sub-sectors break down as follows: information technology services, 27.4 per cent; Internet software and services, 23.3 per cent; Internet and catalog retail, 11.9 per cent; semiconductors and semiconductor equipment, 9.6 per cent; technology hardware, storage and peripherals, 8.7 per cent; and biotechnology, 7.4 per cent.
This tech stock fund is managed by Mark Lin, who became its manager in late 2009. Under Mr. Lin, it has produced a five-year compound annual growth rate of 17.3 per cent, ranking in the top quartile of the global equity category.
Aggressive global tech fund with a high volatility rating
CIBC Global Technology is an aggressive equity fund, with just $55.1 million in assets; it has about 34 equity holdings. Though it sticks primarily with large-cap companies, tech companies are volatile, as is reflected in the fund’s high volatility rating of nine out of a maximum score of 10. The fund charges no load, but it has a high management expense ratio of 3.03 per cent.
Then too, because of its small size, we caution that its fortunes can change quickly, and recommend against overweighting in this fund. In fact, like biotechnology funds, this one may be benefiting from the newcomer factor.
Are newcomers late to the technology fund party?
We’ve read a lot lately about the hordes of investing newcomers who are pouring into U.S. biotechnology stocks simply because they have soared in recent years. They’ll pour out just as quickly when biotech stocks slump, the thinking goes, and perhaps the stock market will plunge along with them.
We see some truth in the idea. There is a ‘hot-money’ crowd investing in U.S. biotech these days. Many of these investors are buying equity funds that specialize in this volatile area. They are also chasing after the top-performing funds.
You’d expect these investors to get skittish in the next market setback. Many will switch to other investments as soon as the performance of their funds falters. This could force managers of specialized funds to sell. If so, their selling may push volatile stocks sharply lower.
But that’s what you’d expect from these stocks in a market setback. Then too, some of today’s top performing funds are making heavy bets in thinly-traded and low-priced stocks. These are the stocks they’re likely to dump if they have to raise cash for redemptions.
In short, we think investing’s newcomers may make the market’s volatile sectors that much more volatile. We see this as just one more reason to concentrate on building a well-diversified portfolio that gives you balanced exposure to all the sectors of the economy.
So the best time to take a position in a tech fund like CIBC Global Technology would be in the event of a market correction. Our advice, then, is to buy on weakness.
Canadian Mutual Fund Adviser, MPL Communications Inc.
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